Economic Encounters of the Plural Kind

Archive for June, 2011

Steven Greenhouse, who generally covers labor issues for the NYT, has a blog post about a new paper on the current “jobless and wageless recovery.” The authors (Andrew Sum, Ishwar Khatiwada, Joseph McLaughlin, and Sheila Palma, from the Center for Labor Market Studies at Northeastern University) present the most comprehensive statistics I’ve seen on how capital has recovered in lieu of labor. The chart below, for example, shows that 92% of national income growth has gone to corporate profits in the current recovery.

The same dynamics that led us into the crisis are leading us forward in stagnation. There is no reason to expect a vibrant recovery in consumption if all gains in output and productivity are going to corporations, while government money is running to the sidelines.

The authors don’t delve into what’s causing this dynamic, but it should be obvious to anyone who has followed American political economy in the last 3 decades. Corporations simply have too much power in economic and political spheres. American workers and voters are no longer organized to fight this power. I originally saw the election of 2008 as a correction from the usual feedback loop, and it certainly has been in some ways, but certainly not to the extent that is needed.

Benedict XVI’s Secretary of State, Cardinal Tarcisio Bertone, delivered the opening address at the Vatican’s Business Summit which engages business and finance with Catholic Social Teaching [ht:ba].

“Aiming at a higher goal” – a goal greater than profit – while not “rejecting profit”, represents the great challenge facing today’s business leaders who are seriously concerned to promote the common good and development – business leaders, in other words, who see their activity as a task and a vocation. The exclusive pursuit of profit proves inadequate as the economy and society nowadays have to deal with new challenges, including the environment, “common goods” and globalization.

This brings us to the great theme of business and social responsibility. Caritas in Veritate has pointed out that “business management cannot concern itself only with the interests of the proprietors, but must also assume responsibility for all the other stakeholders who contribute to the life of the business: the workers, the clients, the suppliers of various elements of production, the community of reference” (No. 40).

Ethical theories concerned with business and social responsibility abound, but not all of them are acceptable in the light of the Christian understanding of man and an authentic Christian humanism. This is especially true of those cases where socially responsible practices are adopted primarily as a marketing device, without any effect on relationships inside and outside the business itself, the destination of its profits, the demands of justice, worker participation, and so forth.

Nowadays business leaders who want to take the Church’s social teaching seriously will need to be more daring, not limiting themselves to socially responsible practices and/or acts of philanthropy (positive and meritorious though these may be), but striking out into new territories.

While this is Catholic Social Teaching, I do believe that there are many aspects that are broadly appealing. For one, businesses should make decisions that incorporate the interest of all stakeholders, including workers, managers, owners, and the surrounding community, rather than just the shareholders of the firm. Secondly, where socially responsible practices are undertaken as a marketing device is not sufficient. We need to heed the Cardinal’s call to be “striking out into new territories” when it comes to organizing our economic life. Thinking along these lines is the only way we will be able to build a just, ethical economy.

For all the enjoyment I receive from reading Nicholas Kristof (see my previous post), he certainly does not have everything quite right. Mark Engler [ht:cr] points out how mistakenly placed is Kristof’s praise of the economics profession:

No matter how disastrously myopic they might be, it seems that economists can do no wrong in the eyes of many.

If there was one outcome of mainstream economists failing to recognize the multi-trillion dollar housing bubble of the past decade and being roundly blindsided by the most significant economic downturn in three-quarters of a century, you would think it would be a decrease in the amount of respect afforded to their “expert” opinions.

Instead, with a distressing lack of mea culpas, the economics profession — still dominated by neoclassical, “free market” assumptions — continues its march of progress. Ever greater swaths of public life and democratic decision making are handed over to economists, and they continue to fearlessly propagate the idea that they are the right technocrats to get the job done.

Now, globetrotting liberal Nicholas Kristof of the New York Times has decided to give them a hand. In his column, “Getting Smart on Aid,” he offers — without irony or any mention of recent blemishes on their record — “a paean to economists.”

…

If our society’s alternative to irrelevant political scientists is letting economists take over the university, I’d say we’re in big trouble.

What Engler is especially attuned to is the economic’s professions unwillingness to admit any culpability for the ongoing financial crisis. In fact, many economists are already in denial that anything much went wrong or that anything has to change. So yes, Engler is right: we are in big trouble.

The Economist’s visceral reaction is to scoff whenever a non-economist says something about the economy. I’ve seen the attitude time and again that, privileged to economic knowledge, Economists have no economics to learn from the rest of society. Yet I’ve witnessed that much of what economists have to say about the economy is useless at best, and incredibly destructive at worst (such as all the advice about financial deregulation since the 1990s). And at the same time, I’ve been left with no doubt that journalists, social scientists, moral philosophers, bloggers, business people, and even everyday workers can have a great deal of economic insight.

This time, a gem of economic insight from Nicholas Kristof at the New York Times. What Kristof realizes, and many economists apparently do not, is that any plan for economic recovery and prosperity necessarily needs to look seriously at the organization of firms in the United States. Publicly-traded corporations are not the only option; in fact, they seem to be one of the worst. There are various models of different organizational, decision-making, and ownership structures that lead to different economic outcomes. Kristof argues that if we want a model that encourages human development, affords universal access to healthcare, and curbs income inequality, we have a lot to learn from the organization of the US military:

You see, when our armed forces are not firing missiles, they live by an astonishingly liberal ethos — and it works. The military helped lead the way in racial desegregation, and even today it does more to provide equal opportunity to working-class families — especially to blacks — than just about any social program. It has been an escalator of social mobility in American society because it invests in soldiers and gives them skills and opportunities.

The United States armed forces knit together whites, blacks, Asians and Hispanics from diverse backgrounds, invests in their education and training, provides them with excellent health care and child care. And it does all this with minimal income gaps: A senior general earns about 10 times what a private makes, while, by my calculation, C.E.O.’s at major companies earn about 300 times as much as those cleaning their offices. That’s right: the military ethos can sound pretty lefty.

Now this is a model of the economy that I think deserves a Nobel Prize.

Today marked the end of the 2011 History of Economics Society annual conference, hosted this year at Notre Dame. There were many interesting discussions, and keynote lectures given by journalist John Cassidy and historian of physics David Kaiser. But here I want to focus on this year’s HES presidential address, annually given by the outgoing president of the society.

This year’s HES president, Jerry Evensky of Syracuse University, gave a lecture entitled “What’s Wrong with Economics?” His brief answer to this question is that we ignore what he calls the “Pogo Principle,” that is, that “We have met the enemy and he is us.”

As a scholar on Adam Smith, Evensky says that the problem with economics today are models based on “homo economicus” because there is no room for vice or virtue or ethical behavior. Unlike the conception of man that was used by Adam Smith, homo economicus has no norms.

This also relates to the lack of analysis of power and power structures in society. According to Evensky, power can be generated by both political institutions and socially constructed norms such as gender or race. Given the existence of power structures, unfettered competition will NOT be fair competition. Rather, “the powerful win in the race for wealth because they control the race.” But these concepts elude economists who use the standard economics toolkit of utility maximization. For Evensky, the value of a research toolkit is not in the answers it gives, but in the questions it encourages us to ask. By this measure, the neoclassical economics toolkit leaves much to be desired.

Evensky ended his talk on an even more troubling note. He explained how the history of economic thought course that he taught at Syracuse had been part of the core graduate economics curriculum when he went to work there. But, the department decided that HET course had a very high opportunity cost and should not be part of the core; in 2002 the course ended. This is not a trend that will help economists remember the “Pogo principle” in the future.

The Nation had 16 activists respond to the question, “If you had the ability to reinvent American capitalism, where would you start? What would you change to make it less destructive and domineering, more focused on what people really need for fulfilling lives?” Three of them resonated with me in particular: Chris Macklin on employee ownership, Dirk Philipsen on how we measure prosperity, and Eugene McCarraher on our “moral imagination.”

I’m not going to block-quote them, however- instead, I’ve put in my own reader submission (limited to 400 words), which the magazine is soliciting from its readers. You’ll see that it attempts to weave together concepts from all three of these columns:

Capitalism’s defining quality is evident in its name- capital, not labor, nature, or morals, is put above all else. This preeminence of capital has ramifications for how we produce, consume, earn, save, and tally it all up; I argue that it causes problems in each of these facets of our economic life. Often, people confuse capitalism with markets (free ones in particular). Instead, I think capitalism has a few distinctive consequences: 1) surplus is distributed by those who own, not those who work and make; 2) more consumption is always better; and 3) anything “outside” the economy, like the environment, may as well not exist.

Capital is relevant to these features because it means that the production process can be owned, and thus the fruits of it can be immediately taken from the hands that produce it. As a corollary, this means that to profit, those who own capital must sell as much as possible, some of which is indeed bought back by those who make the goods. And finally, capital seeks its return without any regard to destruction that it doesn’t have to pay for, like ozone depletion or disappearing wetlands.

As long as capital remains preeminent, we cannot remake capitalism. Instead, we need to gradually remake economic structures to chip away at capital’s power. Giving workers stock ownership is one small step, but giving workers complete control over their enterprise is a more radical fruitful step. It would mean that production and consumption would be more tightly linked, as the amount one consumes would be more in line with what one produces. Lavish consumption would not disappear entirely, but would be made scarce. Remeasuring economic value to include environmental externalities is another small step, but forcing these externalities into pricing through democratically-decided taxes is a larger and more fruitful step (and I guarantee, a worker-run Chamber would fight it a lot less).

These steps must be supported by increased class consciousness through education. The value of worker ownership and environmental stewardship are obvious to their beneficiaries; demonstrating that capital’s dominance stands in the way of these benefits is critical. A class-conscious society will support economic structures that value labor and value nature, not just profits. Changing capitalism does not mean removing markets or destroying property, but rather reshaping production and consumption markets so economic value is not distorted by power divides between capital and other.

Open Economics

This blog is administered by a group of students and alumni from the University of Notre Dame who are interested in engaging and debating the world of economic phenomena we face, everywhere and everyday.
Disclaimer: Opinions expressed herein are the authors' own and not those of any organizations or employers to which they are attached.